DELIVERING ENERGY FOR THE FUTURE

Transcription

1 DELIVERING ENERGY FOR THE FUTURE ANNUAL REPORT & ACCOUNTS 2016

2 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 AFC Energy, the industrial fuel cell power company, is the leading developer of lowcost alkaline fuel cell systems using hydrogen to produce zero emission electricity. AFC Energy fuel cell system at our plant in Stade, Germany. Our fuel cell has the potential to be the catalyst which transforms the way in which industries of today produce energy for tomorrow. Visit our website at WHAT WE DO AFC Energy is focused on developing large-scale and distributed stationary fuel cell applications, utilising alkaline fuel cell technology, supplied by industry sourced hydrogen feedstock. PAGE 04 WHY WE DO IT The inexorable growth in demand for clean energy coupled with the fact that hydrogen is the number one industrial gas, based on number of molecules produced, means that hydrogen fuel cell technology is here today providing a wide range of power needs. PAGE 06 HOW WE DO IT Modularised fuel cell system design that can be repeatedly scaled to deliver much higher power outputs. WHY WE ARE DIFFERENT AFC Energy is the only large-scale developer of alkaline fuel cells. Testimony of this was the delivery of a 240kW fuel cell ("240 FC") at our plant in Stade, Germany. PAGE 10 PAGE 09

3 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS WELCOME TO THE AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 STRATEGIC REPORT Strategic Report Chairman's Statement 02 A Year of Breakthroughs 03 Our Technology 04 Market Overview 06 How We Measure up 08 Our Business Model 10 Operational Review 12 Strong Partnerships 16 Managing Our Risks 18 Corporate Social Responsibility 20 GOVERNANCE FINANCIAL STATEMENTS AFC Energy s automated stack assembly robot. Governance Introduction to Governance 22 Our Experienced Leadership 24 Directors' Interests and their Remuneration 26 Directors Report 28 Statement of Directors Responsibilities Quality assurance/control. Financial Statements Independent Auditor s Report 31 Statement of Comprehensive Income 32 Statement of Financial Position 33 Statement of Changes in Equity 34 Cash Flow Statement 35 Notes Forming Part of the Financial Statements 36 Company Information AFC Energy s laboratory gas manifold.

4 02 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 CHAIRMAN S STATEMENT - STAYING THE COURSE After good technical and strategic progress in 2016, AFC Energy is poised to move into commercialisation in 2017 with a strengthened management team and a now strengthened balance sheet. TIM YEO CHAIRMAN OVERVIEW In November 2016, the Paris Agreement on Climate Change came into force. For the first time, legally binding limits to global temperature rises have been agreed by nearly 200 countries. While the carbon emission curbs proposed are not themselves legally binding, the mechanism for periodically tightening those pledges is. Governments including the US, China, India, and from the EU, are now collectively obliged to constrain global warming to no more than 2 o C above pre-industrial levels (1.4 o C above present levels). While the journey to implement the required carbon emission reductions will inevitably face challenges along the way, not least given the recent pronouncements from the new US administration, it is evident that the wider international community remains committed to a lower carbon economy. There is also support by global business leaders one prime example being the recent announcement of the establishment of the Hydrogen Council, at the Davos 2017 World Economic Forum. Its members including Royal Dutch Shell, Alstom, Air Liquide, Daimler and Toyota, among others plan to invest 10 billion in hydrogen-related products within the next five years. Hydrogen is expected to play a key role in supporting this transition to a low-carbon economy, especially within the transport, energy and petrochemical industry sectors, and the associated value chain. The Board therefore continues to believe that stationary fuel cells have an important role to play globally and that AFC Energy has the technology and team to take a central position within this low-carbon economy, for both industrial scale and distributed generation applications. KEY DEVELOPMENTS The successful generation, in January 2016, of gross electrical output in excess of 200kW at the Company s first industrial scale fuel cell power plant in Germany, was a strong start to the year. To maintain momentum, in March 2016, the Board issued the 2016 Strategic Milestones. Underpinning these milestones was the necessity to define, and share with our stakeholders, the fundamental metrics which the Company is focusing on to enable the commercialisation of the AFC Energy fuel cell system: Power, Longevity, Availability, Cost, and Efficiency. Both the management team and the Board remain focused on finalising the development of a readily deployable commercial product which is attractive to our target customer base. Among other 2016 achievements, AFC Energy delivered the Generation 2 ( Gen2 ) fuel cell system which operated for more than 1,000 continuous hours (at which point the test was concluded), completed the basic design and engineering of the Company's new 10kW fuel cell system, and initiated and advanced dialogue for several commercial fuel cell opportunities. This was complemented by our success in establishing two new key strategic partnerships with Industrie De Nora S.p.A. and planting GmbH both providing strong technical expertise and sector experience to support AFC Energy deliver its commercialisation objectives. The journey continues into 2017 with the Company now prioritising its activities to enable the commercial deployment of its fuel cell systems. The successful completion of the 8.1 million equity fundraise in March 2017 provides the Company with a strong cash position to achieve this target. While there may be challenges along the way, the Board and I remain confident that AFC Energy has set the appropriate course to achieve commercialisation. Our experienced leadership and strengthened management team should enable us to continue to make sound progress with our partners. I would like to thank all the staff, partners and contractors working with AFC Energy, in addition to my fellow Board members and shareholders, for their continued support. TIM YEO CHAIRMAN 23 March 2017

5 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS A YEAR OF BREAKTHROUGHS AFC Energy's achievements this year saw breakthrough steps with its technology and the successful completion of target Milestones. JULY 2016 Next iteration 10kW Fuel Cell Engineering Completed 2016 JANUARY 2016 Power Output of 204kW Achieved AFC Energy successfully achieved a total power output of 204kW at its 240kW fuel cell ( 240 FC ) power plant in Stade, Germany. This provided a number of significant technical firsts for the Company. The majority of the 24 stacks trialled in Stade, achieved 10kW or more of power output. Automation of start-up, operation and shutdown were fully demonstrated. The fuel cell system was signed off by German engineers for safety and robustness of design. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS Design and basic engineering of the next iteration 10kW fuel cell, including accompanying Balance of Plant ( BoP ), was completed, accomplishing Milestone 4 of the 2016 Strategic Milestones ahead of schedule. This included a thorough examination of key NOVEMBER 2016 Generation 2 Fuel Cell Testing Successfully Completed AFC Energy successfully completed the development of its Gen2 fuel cell stack. Gen2 incorporates design changes to extend the operating life of the fuel cell stack, while increasing stack availability (i.e. the proportion of time the fuel cell stack is on average available to generate power) and reducing cost. These features represent three of AFC Energy's key metrics which have been identified for commercialisation. performance metrics and a Hazard and Operability study ( HAZOP ). The HAZOP was conducted with participants from AFC Energy, planting GmbH and independent fuel cell and hydrogen expert consultancy Efficientics. These two milestones, in addition to those achieved earlier in the year, position us for delivery of commercial contracts which we continue to pursue and in turn provide the traction needed with our partners for the deployment of units and the fulfilment of the outstanding 2016 Milestones. ADAM BOND CHIEF EXECUTIVE OFFICER AUGUST 2016 Strategic Technology Collaboration with De Nora Signed AFC Energy entered a Joint Development Agreement ("JDA") with Industrie De Nora S.p.A. ("De Nora") targeting technological enhancements to AFC Energy's fuel cell system and to further accelerate commercialisation of AFC Energy's technology platform. The parties plan to widen the collaboration to develop new product offerings, combining AFC Energy s fuel cell system with De Nora's complementary systems, to access new markets for mutual benefit. PAGE 16 NOVEMBER 2016 Agreement with Peel Environmental for Assessment of Hydrogen Fuel Cell Precinct AFC Energy signed an agreement with Peel Environmental Limited ("Peel") to assess the techno-economic feasibility of the UK's largest hydrogen fuel cell precinct at Peel's Protos industrial park in the UK. A positive outcome from the techno-economic assessment for the development of a 35MW to 50MW fuel cell project at the Protos site could see the development of the UK's largest stationary fuel cell project and one of the largest in the world, confirming a growing transition towards a hydrogen-based economy, thereby positioning Protos and AFC Energy at the forefront of this movement. PAGE 17 Please visit our website for more news at

6 04 OUR TECHNOLOGY AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 Highly Fuel Efficient, Environmentally Acceptable Power Generation Why alkaline fuel cells ( AFCs )? A fuel cell hosts and facilitates the controlled chemical reaction of hydrogen and oxygen (from the air) to produce an electrical current. The direct conversion of chemical potential energy to electrical energy in a single step means that fuel cells are highly efficient. With their potential for up to 65% electrical efficiency, AFCs have the scope to be the most efficient of all fuel cell types. How Does an Alkaline Fuel Cell Work? AFC ENERGY FUEL CELL SYSTEM ELECTRICITY HYDROGEN INPUTS WATER OUTPUTS OXYGEN HEAT Hydrogen Water Electron Flow Anode Load Hydroxyl Ions Electrolyte Cathode Oxygen ALKALINE FUEL CELL An AFC is a device that implements the reaction of oxygen (from the air) with hydrogen (from an external supply source) to generate heat, electricity and water. Fuel cells are similar to batteries, but differ in one critical area: given the continuous supply of fuel and air, electricity, heat and water can in turn, be continuously generated (batteries have a finite amount of fuel and so, once this is exhausted, they stop operating). The only by-products of AFCs are demineralised water and heat both of which have commercial value. Apart from water, an AFC is a zero-emission green generator.

7 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS Benefits of Alkaline Fuel Cells AVAILABLE HYDROGEN Hydrogen can be generated by renewable energy (such as wind and solar PV) in significant, sustainable quantities. By-product or vented hydrogen sources include: bio-mass, glass production, hydrocarbon processing and chlor-alkali facilities. Vented hydrogen arises as a by-product of many chemical processes, for example, the manufacture of chlorine can result in the generation of excess quantities of hydrogen. WATER AND HEAT AS BY-PRODUCTS AFC by-products consist of water and heat. The production of water is seen as a benefit in specific regions around the world, while the heat produced may be captured and used on site or in a local end-user s industrial process. This generates heat load, has the potential to further reduce both the enduser s energy requirements from the grid and their potential carbon emissions. MORE EFFICIENT AT ALL LEVELS OF UTILISATION An AFC does not burn fuel like an internal combustion engine or turbine so it does not need to drive pistons or turbines. Avoiding this intermediate mechanical step and having a direct conversion route to electricity is what makes an AFC so efficient. An AFC is also "scaleable" without impacting efficiency. The low operating temperature results in quicker start-up times and the use of lower cost construction materials. OPERATING TEMPERATURE Fuel Cell Type SOLID OXIDE MOLTEN CARBONATE Operating Temperature 500 1,000 O C C STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS QUIET AND CLEAN AT POINT OF GENERATION AFCs have few moving parts. Small electrical pumps and blowers move gases and liquids around the system. Therefore, it is quiet compared to traditional technologies. Its only by-products are water and heat. LOW LIFETIME COST OF OWNERSHIP We aim to reduce the cost of ownership through a lower operating temperature (i.e. below 100 C) with consequential use of more affordable materials. Additionally, we have the ability to recycle the materials we use in our fuel cell system. PHOSPHORIC ACID POLYMER ELECTROLYTE MEMBRANE ALKALINE ELECTRICAL EFFICIENCY 65% 60% 55% 55% 40% 29-31% 25-30% O C <120 O C <100 O C 65% ALKALINE UP TO 60% SOLID OXIDE UP TO 55% POLYMER ELECTROLYTE MEMBRANE UP TO 55% MOLTEN CARBONATE 40% PHOSPHORIC ACID 25-30% DIESEL GENERATORS 29-31% GAS TURBINE (SIMPLE CYCLE) AFC Energy s 240kW fuel cell system, the world s largest AFC installation, at our plant in Stade, Germany. Source:

8 06 MARKET OVERVIEW AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 The production of lower cost power from highly fuel efficient AFCs is competitive against mainstream forms of electricity generation and has enormous market potential in a wide range of industrial settings, sectors and environments. Major Trends Impacting our Market INTERNATIONAL CO-OPERATION Governments are increasingly globally co-ordinated in tackling climate change (e.g. the Paris Agreement) through the adoption of decarbonisation policy agendas this is evidenced by the targeting of large-scale, efficient energy integration. Hydrogen storage solutions, when combined with electrolysis and AFC technology can potentially provide a significant hydrogen battery solution for integration with intermittent renewable energy sources. FUEL CELL SHIPMENTS BY APPLICATION NATIONAL GOVERNMENT POLICIES Governments are utilising fiscal incentive structures to prioritise the improved utilisation of limited resources. By-product hydrogen, vented as a waste product, is gaining increased scrutiny. For example, there is recognition of the need to significantly reduce oil-fired power generation in Saudi Arabia, with the utilisation of hydrogen from the petrochemical industry, with AFCs offering one such solution. Korea is also a firm advocate with fiscal incentives seeking to improve hydrogen utilisation. MEGAWATTS BY APPLICATION GLOBAL INDUSTRY Energy intensive sectors are increasingly exposed to government carbon policy and rising power prices. Many international industrial groups now seek cleaner, off grid and long-term affordable energy solutions. The use of by-product vented hydrogen through the adoption of fuel cells will enable industry to mitigate the risk of rising power prices and Government policy ,000 Units Stationary Transport Source: E4Tech (2016 is forecast) MW Stationary Transport Source: E4Tech (2016 is forecast) Growing International Commitment to the Hydrogen Economy In January 2017, the Hydrogen Council launched a global initiative at the 2017 World Economic Forum. The Council currently comprises 13 major industrial and energy companies that are committed to help achieve the ambitious goal of reaching the 2 o C global warming target set in the 2015 Paris Agreement (COP21). The inaugural members are Air Liquide, Alstom, Anglo American, BMW, Daimler, Engie, Honda, Hyundai Motor Company, Kawasaki Heavy Industries, Royal Dutch Shell, The Linde Group, Total, and Toyota Motor Corporation. Its 13 members collectively invest 1.4 billion annually into the hydrogen and fuel cell sectors and plan to boost this amount to 10 billion over the next five years. The Hydrogen Council has called on governments to support the development of infrastructure for a hydrogen ecosystem. Members will collaborate with each other, wider industry, other stakeholders and the public to progress hydrogen technology. Hydrogen is a versatile energy carrier with favourable energy characteristics since it does not release any CO 2 at the point of use as a clean fuel or energy source, and can play an important role in the transition to a clean, low-carbon, energy system The council will work with, and provide recommendations to, a number of key stakeholders such as policy makers, business and hydrogen players, international agencies and civil society to achieve these goals. THE HYDROGEN COUNCIL

9 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS How we are Responding AFC Energy is targeting a global opportunity - the generation of electricity that is competitive against mainstream sources has significant market potential across a wide range of regions, both in an industrial and distributed setting. KEY TARGET REGIONS We target partners in markets where there is supportive Government policy, with demonstrated private sector appetite to diversify energy sourcing, through the introduction of our fuel cells. MARKET OPPORTUNITIES The production of low-cost electricity that is competitive against mainstream forms of electricity generation has enormous market potential in a wide range of industrial settings, sectors and regions. KEY TARGET INDUSTRIES We are targeting large-scale stationary industrial power plants, and distributed off grid applications rather than nascent household or vehicle applications. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS UK Hydrogen could provide significant benefits to the UK s energy system and play a greater role in the UK s energy mix. In 2016, the UK launched a public-private roadmap exercise to drive sustainable economic growth in the UK hydrogen and fuel cell industry to 2025 and beyond. GERMANY Within the EU, Germany has led the introduction of fuel cells through the European Fuel Cells and Hydrogen Joint Undertaking ("FCH JU"). Assuming 90% renewables adoption, the Hydrogen Council expects c.170twh/year of curtailed renewable power by 2050, which may alone create an opportunity for c. 60GW of electrolysis capacity. Source: "How hydrogen powers the energy transition", January 2017 UNITED ARAB EMIRATES AND OTHER MIDDLE EAST The UAE is at the forefront of the development of renewable energy in the MENA region. AFC Energy is targeting the sale of both power and water into the local market, through utilisation of its fuel cell systems. SOUTH KOREA Financial incentives paid to producers of electricity generated from fuel cells make South Korea a particularly attractive target market for AFC Energy s fuel cell systems. LARGE-SCALE STATIONARY INDUSTRIAL POWER PLANTS We are focused on industries where hydrogen is easily available and offers low feedstock costs as a by-product from manufacturing processes. Large stationary units refer to multimegawatt power plants providing primary power. These units are being developed to replace power from the grid and can also be used to provide grid expansion nodes. OFF GRID DECENTRALISED POWER GENERATION Decentralised or distributed applications can be targeted in areas where there is little or no grid infrastructure. This may include isolated, or island communities, remote facilities (e.g. mining), or as a substitute for diesel back up generation. FUEL CELL INTEGRATION OPPORTUNITIES Significant opportunities arise through the potential to develop a hydrogen battery which addresses the power supply/demand challenges encountered with intermittent renewable power. Further, the Company believes that material value can be created through the efficient integration of its fuel cell system, with water treatment and associated electrolysis technologies. NATURAL AND BIOGAS Natural gas and biogas are predominantly methane which is hydrogen-rich. Hydrogen is released using a standard industrial process known as steam methane reforming ("SMR"). Developments in this field are leading to improved economics for the smaller scale reforming of steam methane. ENERGY FROM WASTE ("EFW") Hydrogen can be generated economically from domestic and commercial waste due to its high hydrocarbon content. AFC Energy s alkaline fuel cell systems have the potential to generate c. 40% more electrical power from the same waste, lowering carbon emissions by the same amount. ELECTROLYSIS Water electrolysis, using renewable electricity, offers significant benefits to the electricity sector in supporting the integration of renewable generating capacity and providing grid-balancing services. The hydrogen obtained with this technology has a high purity that can reach vol.% once the produced hydrogen has been dried and oxygen impurities removed.

10 08 HOW WE MEASURE UP AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 AFC Energy has developed an alkaline fuel cell system which converts hydrogen into power. Its technology has the potential to be a catalyst in transforming the way today's industries produce energy for tomorrow. 1 We aim to partner with industries that have an abundance of hydrogen as a by-product. PAGE 07 Technology and Manufacturing At the forefront of innovation, AFC Energy is re-engineering effective technology using modern materials readily available today. PAGE 04 4 The energy produced can be sold to the internal and/or the external grid. PAGE 05 Our Value Chain 2 The hydrogen is tapped straight into the AFC Energy fuel cell. PAGE 04 Commercial Potential We are looking to build a pipeline of commercial opportunities through the delivery of a technically optimised fuel cell system. 3 Water and heat as a by-product can be sold for beneficial impact. PAGE 05 PAGE 07 Leading Partnerships Working with market leading partners helps AFC Energy to deliver a commercial product quicker. PAGE

11 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS Technical Development Targeting Five Key Metrics Required for a Commercial Power Plant POWER 204kW produced from first industrial scale fuel cell plant in Germany In excess of 10kW of power generated from multiple fuel cell stacks operating at the plant, against a 10kW design rating LONGEVITY Delivered Gen2 fuel cell system which operated continuously for > 1,000 hours AFC Energy targeting minimum one year longevity AVAILABILITY Already achieved over 90% availability on stack over one month s operation (against target of 90%) Automation of start up, operation and shutdown supporting enhanced system availability and control from offsite COST Basic modular design, using standard industrial materials Ease of operation and maintenance STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS EFFICIENCY Alkaline fuel cells offer highest electrochemical efficiency of all fuel cells Potential to deliver up to 65% efficiency WHAT MAKES OUR ALKALINE FUEL CELLS (AFCs) DIFFERENT? The key differentiator for fuel cells, generally, is the high fuel efficiency. AFCs are at the top of the range in this regard. AFCs utilise a liquid electrolyte in the system. Our liquid electrolyte facilitates lower operating temperatures of c. 60 o C, versus hundreds or thousands of degrees Celsius for other fuel cell technologies. We therefore have more flexibility to use standard and lower cost industrial materials across the entire fuel cell system this allows ease of manufacture of modular skids and a lightweight overall unit, lowering capital and operating expenditure. A key objective has been to design the AFC Energy fuel cell system for re-use or recycling, so that 80% is re-usable, making our systems more environmentally attractive whilst reducing the levelised cost of electricity through re-use. All of which contribute to lower cost and competitive advantage. There is scope to integrate our alkaline fuel cells with alkaline electrolysers (which generate hydrogen), which could form a green integrated hydrogen generation/ conversion technology platform. This gives us greater flexibility to integrate with parallel technology. Our simple modular design basis for the fuel cell cartridges and balance of plant allow for volume scale up (from kw to MW), utilising the same standard 10kW fuel cell "building block" for each power plant. The modular approach assists with the standardisation of the manufacturing and assembly processes, streamlines procurement, disassembly and recycling, and simplifies power plant construction, operation and maintenance. This enables us to provide scalable solutions to our prospective customers. AFCs offer the highest electrochemical efficiency of all fuel cells. Our AFCs have the capacity to operate on lower grade industrial hydrogen we are working to ensure they can accept hydrogen from industrial facilities, with limited required purification. This allows more affordable and a broader range of available feedstock all of which improve the viability and market potential of our alkaline fuel cells.

12 10 OUR BUSINESS MODEL AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 Our aim is to install, own, operate and maintain stationary alkaline fuel cell systems that generate durable power at the highest levels of fuel efficiency for the future. AFC Energy seeks to be a world-class energy company that deploys low cost, high performance alkaline fuel cell technology to the global market. Targeted Sources of Income SALES REVENUES Although, in the longer term, we may wish to retain ownership of our fuel cell systems, we will also remain open to opportunities to sell our fuel cell systems, where project and partner requirements require an alternative approach. AFC ENERGY SHAREHOLDER PARTNER ELECTRICITY, HEAT AND WATER REVENUES Revenues from the sale of power, heat and water, whether from AFC Energy alone projects, or in conjunction with partners and joint venture arrangements. AFC ENERGY SUPPLIER DIVIDENDS Project Joint Venture POWER SALES ($) MAINTENANCE AND SECURITY Our fuel cell projects will have a life of 20+ years operation, providing the opportunity to offer services and maintenance contracts for the fuel cell cartridges and systems, generating longterm annuity revenues. LICENCE REVENUE We remain open to opportunities to generate licence fee income for our fuel cells in markets, which have a longer sales/delivery process. Working in this way may minimise our business development costs and help deliver recognition in complementary markets earlier. CUSTOMER WATER SALES ($) DEVELOPMENT INCOME External agency funding enables our share capital to work harder. At AFC Energy, we look to fit our development needs within defined funding rules. This allows projects to be delivered earlier and with less call on internal financial resources for capital items. AFC Energy targets co-ownership of projects through joint ventures, where our interests are aligned with those of our partners, by having skin in the game. OVERHEAD COVERAGE Many funding agencies fund direct time spent on key technical research, development and demonstration. A portion of overhead recovery is also permitted. This significantly mitigates our monthly cash burn rates. The building block of every AFC Energy fuel cell system is, currently, the 10kW stack. AFC Energy aims to provide clean power solutions from as small as 10kW up to multi megawatts the only difference being the associated BoP. We use the same basic fuel cell stack in all systems. The 10kW modular unit provides a low cost entry option for prospective partners, which offers a smaller scale demonstration plant that may lead to a large-scale plant development by our partners and customers. One of the trends in the global energy market is the movement towards off-grid, distributed power models where power demand may often be less than a standard 240 FC system, but is open to pricing which is substantially higher than conventional wholesale power pricing. Diesel generation is one obvious example where our fuel cells have the potential to displace existing plants. AFC Energy plans to conclude the basic design and engineering on a 1MW capacity fuel cell system, which is capable of deployment in 2017.

13 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS Integrated Solutions Provider We aim to provide our fuel cells not only for stand-alone power solutions, but also as a flexible building block which can be integrated with other related technologies, delivering a broad range of solutions for our customers. HYDROGEN BATTERY The AFC Energy fuel cell can be deployed as part of a "hydrogen battery" scheme. When grid demand is low, excess power generated from renewable sources, such as wind or solar, can be diverted to a water electrolyser for hydrogen generation. Wind/Solar energy Treated water for electrolysis Electrolysis The produced hydrogen can then be stored and optimally released to our fuel cells at periods of peak demand (with higher tariffs), to support grid power requirements, when required. WASTE WATER TREATMENT Hydrogen gas Storage Oxygen gas Fuel Cell The AFC Energy fuel cell can also be deployed as part of a waste water treatment integrated solution. Following preliminary treatment, waste water can be electrolysed, to generate hydrogen and oxygen. The by-product hydrogen and oxygen can then be delivered to the AFC Energy fuel cell system, to generate power and clean water, which can be re-used. Power Clean H 2 0 for re-use The electrolysis can be powered by, for example, renewable solar or wind power. Further, this system can be supplemented with hydrogen storage, to optimise delivery of power/water for peak demand periods. Creating Value AFC Energy is conscious of its obligation to effectively manage its relationships with a broad group of stakeholders which include: SHAREHOLDERS AFC Energy acknowledges the importance of creating sustained long-term shareholder value, which ultimately hinges on commercialisation of the technology and maintaining a broad-based competitive advantage over substitute or near substitute offerings. PARTNERS AFC Energy places high priority on the need to establish and nurture key strategic partnerships in which our partners can form a clear line of sight on how they will derive long-term exceptional value from their collaboration with us. EMPLOYEES Without our employees, AFC Energy is not able to deliver on our technical milestones and execute the power projects which are required to utilise our technology AFC Energy is focused on the long-term development of all our staff to ensure they remain motivated to deliver outstanding performance for the business. CUSTOMERS We regard our customers as our partners if they succeed, then so do we. The Company has identified priority performance metrics for a commercial product, which our customers will demand it is our duty to supply this and ensure that our fuel cell system remains robust in divergent environments, reliable and available when power is required. COMMUNITIES AFC Energy is primarily targeting large-scale industrial applications for the fuel cell system but is also considering distributed and related applications (such as water treatment), which has tremendous potential to serve communities. AFC Energy also highly values the relationships it has with those parties with common interests in our project locations and seeks to maintain a positive dialogue and transparency with its local communities and neighbours. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS

14 12 OPERATIONAL REVIEW AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS was an important year of consolidation for the Company with material improvements not only in the fuel cell technology platform, but also in the dialogue with several key commercial and strategic partners for AFC Energy. The corporate value gained from AFC Energy s collaboration with De Nora, and the commencement of commercial project developments with Peel Environmental, cannot be undervalued and positions the Company well for an accelerated programme of activities in ADAM BOND CHIEF EXECUTIVE OFFICER In December 2014, the Board of AFC Energy made a conscious decision to switch its focus away from the laboratory to the acceleration of R&D and ultimately the commercialisation of an industrialscale fuel cell system. In taking this decision, I outlined a three-year window of opportunity which would see AFC Energy progress from a company that had managed to deliver a 9 cell stack (equivalent to less than 1kW of gross output) through to a technology platform capable of running multi-megawatt projects across several international jurisdictions. It is safe to say 2015 saw significant progress not only in upscaling the stack from 9 cells to 101 cells in a few months, but also in delivering the world s largest alkaline fuel cell installation in Stade, Germany with a nameplate capacity of 240kW. The progress was tangible and outcomes were transparent insofar as for the first time in AFC Energy s history, the Company had a reference plant capable of demonstrating the operating capability of its proprietary fuel cell technology. Whilst many investors saw this as the end of the commercialisation roadmap, the process of accelerating the installation in Stade delivered for AFC Energy many findings which could only be identified once a fully industrial system was up and running, and indeed, with these findings came the need for further refinement of the system. To this end, 2016 became the year of consolidation. Having now done the hard yards and exhibited the technical discipline to bring AFC Energy s fuel cell technology back to where we believe it needs to be in order to drive commercial partnering opportunities, I believe 2017 to be the year in which we start to see the fruits of our collective labour as we close in on the final phase of the three-year window. OPERATING REVIEW Technology Having spent much of my career in the energy sector, the expectations of a power plant developer and owner on a generation technology provider always come back to their ability to demonstrate five key metrics which at AFC Energy have become known as the metrics of commercialisation. These metrics, being Power, Longevity, Availability, Cost and Efficiency, have provided AFC Energy with its internal key performance indicators of success throughout the year. The commissioning and demonstration of AFC Energy s 240kW system in Stade in January 2016 went a significant way to demonstrate the capability of the Company s proprietary fuel cell technology package. In particular, it demonstrated the ability of our system to deliver power from our fuel cell at or near nameplate on a cartridge by cartridge basis, providing empirical evidence for the first time of the technology s longevity, availability, cost and efficiency. In all cases, the Stade reference plant gave clear guidance as to those areas AFC Energy needed to address before its technology could be classed as commercial. Throughout 2016, AFC Energy embarked on a series of work packages, colloquially named Gen2, which sought to address a number of the issues associated with our findings identified at Stade. The endeavours made on these work packages included a more focused discipline by which the technology development and rigorous assessment of these findings became solutions. To the credit of AFC Energy s team, the culmination of these work packages came in the latter quarter of the year when two of AFC Energy s stacks, operating at Stade and at the Company s facilities in Surrey, delivered in excess of 1,000 hours of continuous operation Three-Year Accelerated Path to Commercialisation 2015 Focus: Build and commission world's largest alkaline power plant Focus: Delivery of second generation fuel cell and initiation of commercial pipeline Focus: Fuel cell deployment Power project evolution and deployment Develop robust pipeline of project opportunities to position AFC Energy technology.

15 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS AFC stack build. at very high levels of availability over this period. This compared with a few tens of hours at Stade upon initial commissioning in January 2016, ahead of eventually meeting our milestones. In addition to this achievement of longevity and availability was AFC Energy s demonstration that its technology could accept, without loss, hydrogen sourced at much lower qualities than had been tested previously. The lower grade hydrogen being used in these Gen2 trials was akin to that found at industrial gas plants and capable of being stripped direct from, for example, a chlor-alkali plant one of AFC Energy s key target markets for fuel cell deployment. This outcome alone had an enormous impact not only on the size of market AFC Energy would now address, but also on the economics of each project which might otherwise have required extensive investment in hydrogen clean-up before being capable of acceptance by AFC Energy s fuel cell. The Gen2 design, not only of the fuel cell stack and electrodes, but also the balance of plant, significantly built on the system employed at AFC Energy s industrial test facility at Stade, incorporating design changes to extend the operating life of the fuel cell stack, while increasing stack availability, and reducing stack cost. In parallel to this work, we identified the significant value that could be extracted from partnering with one of the world s leading experts in the field of electro-chemistry, Industrie De Nora S.p.A. ( De Nora ) particularly in learning from their own experiences in the successful provision of long life alkaline systems to the electrolysis and chlor-alkali markets over many decades. To this end, following months of technical due diligence and discussions, the parties entered a Joint Development Agreement ( JDA ) in August 2016 which ran in parallel to the Gen2 development programme. We have been extremely pleased with many of the outcomes from the JDA which are now giving renewed confidence to the delivery of a fuel cell cartridge capable of running for at least twelve months, and indeed, exceeding twelve months in due course. The collaboration between our two companies is progressing very well and we are delighted with the positive working relationship that has formed between our organisations over a relatively short time. We expect further announcements throughout 2017 regarding the success of this relationship and the tangible benefits we are starting to see from this strategic collaboration. Additionally, through collaboration with De Nora, there is an opportunity for AFC Energy to better address the chlor-alkali sector, a significant producer of vented hydrogen, for which De Nora is a strong part of the supply chain. I believe this collaboration will deliver a technology platform that enhances the commercialisation timeline and our future success in the alkaline fuel cell space. When put together, the advances achieved by AFC Energy as part of the Gen2 programme, with the outcomes of the JDA collaboration with De Nora, AFC Energy s objective is to be a world-class energy company that leverages the deployment of low cost, high performance alkaline fuel cell technology to target global industrial scale opportunities. give me increasing confidence that we are nearing a point when the AFC Energy technology platform will be in a position to positively confirm its ability to meet the five metrics of commercialisation and therefore, position the Company for project collaboration and commercial deployment during the course of the next twelve months. Market Opportunities At the recent World Economic Forum in Davos, the 13-member Hydrogen Council announced its establishment, calling on Governments to support the development of infrastructure for a hydrogen ecosystem. Given representation from leading global multinationals including Royal Dutch Shell, Alstom, Air Liquide, Daimler and Toyota, this illustrates the significant resources being devoted to the foundations of a global hydrogen economy. AFC Energy will centre itself

16 14 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 OPERATIONAL REVIEW CONTINUED Key Commercialisation Metrics POWER LONGEVITY AVAILABILITY COST EFFICIENCY Output delivered by our fuel cells in terms of kwh Period the fuel cells last before requiring replacement Proportion of time operational (excluding maintenance) Cost to install and operate in terms of $/kwh Energy delivered relative to hydrogen input firmly within that international ecosystem, initially across several targeted regions/countries, to support the commercialisation of our alkaline fuel cell systems, for industrial scale, distributed and related applications. Addressable market opportunities identified by the Company include large-scale stationary industrial power plants, integration with industrial and chemical plants with surplus hydrogen, and off-grid decentralised power generation. To this end, our business model remains intact and robust in pushing forward with new project collaboration opportunities. The past twelve months have seen an aggressive push by the Company into key target markets and industries within those markets. As a result of this investment, we have positioned AFC Energy well to now begin to capitalise on these opportunities, particularly as the robustness of the technology platform improves and we are able to extract real and empirical data from the operating cartridges that supports the metrics of commercialisation to our partners. It is fair to say that whilst expectations were set through the 2016 Milestones that commercial agreements would be reached within that year, the status of the technology at that time provided a challenging platform in which to conclude these transactions. However, each of the partners we have been in dialogue over this time remains open and we are hopeful that 2017 will give rise to an improved platform from which to progress several project deployment opportunities. Whilst our target markets for the most part have remained unchanged, with focus on the Middle East, and North East Asia (Korea and Japan), we have also seen renewed interest from Europe, principally in the UK and Germany. It remains the building block of AFC Energy s commercialisation model to stay focussed on delivering a viable fuel cell system through adoption of our existing core fuel cell technology platform. Whilst a well-known pitfall of clean tech companies has been to diversify offerings too early and divert focus on what might otherwise be core factors in the development roadmap, we have identified a number of deployment opportunities that, when integrated with other technologies, provide real and market-based solutions to existing market-based problems. Key within this are two new models for AFC Energy s fuel cell deployment which we believe could generate new growth markets for our technology platform. Firstly, in recognition of the growing need for energy storage solutions and the role of batteries within that mix, I have commissioned AFC Energy to develop a Hydrogen Battery which, when integrated with curtailed renewable energy sources, electrolysis and hydrogen buffers, provides an efficient, affordable and robust alternative to conventional battery technologies. This integration does not change the form or make-up of AFC Energy s fuel cell technology, but provides a key conversion technology solution that provides a bridge between intermittent renewable power and flexible power demand profiling as is exhibited in any modern-day power market. AFC Energy is also looking to properly integrate its fuel cell technology platform with tertiary water treatment and again, electrolysis, as a basis for remote water treatment solutions to reduce the cost of offsite wastewater transportation and subsequent treatment for many extractive industries, primarily in oil and gas. This is an early phase development but again, utilising AFC Energy s existing fuel cell technology platform and architecture to integrate with other technologies to provide a market-based solution to an ever-increasing problem of contaminated water treatment and disposal. POST YEAR-END DEVELOPMENTS In November 2016, we entered into an important agreement with UK-based Peel Environmental ( Peel ), to assess a substantive fuel cell development opportunity at Peel s Protos Industrial Park located in Chester, UK. This site provides several potential industrial hydrogen sources, some of which are currently venting hydrogen, which in turn, opens the door to scalable fuel cell opportunities. As owner of the Protos site, Peel, together with its regional contacts and permitting and consenting capability, is an ideal partner for AFC Energy to collaborate in the UK s Northern Powerhouse. This project has the potential, following commencement at the 1MW scale, to scale up to an estimated 35MW to 50MW of installed capacity. AFC Energy has already, in conjunction with Peel, commenced dialogue with stakeholders of such potential projects and for the necessary study phase work. With these steps underway, we will provide an update later in More recently, in March 2017, we announced the successful completion of an 8.1 million fundraise by way of a placement, subscription and shareholder offer, which heralded the arrival of new financial institutions on the share register. In addition, we considered it important to provide our existing shareholders with an opportunity to participate, and this was rewarded with a full take up under the open offer. The fundraise will assist the Company to fulfil its strategy to deliver commercial contracts by FUNDED PROJECTS: POWER-UP AND ALKAMMONIA AFC Energy continues to pursue the requirements of the POWER-UP and ALKAMMONIA EU-funded programmes. Much of the work required to deliver POWER-UP was undertaken during the course of 2015 with further work throughout 2016 contributing to the overall objectives of the POWER-UP programme and its key stakeholders. AFC Energy continues to hold dialogue with the Fuel Cell and Hydrogen Joint Undertaking ( FCH JU ) with regards the programme and very much appreciates the support the FCH JU have provided the Company in delivering this significant project. The project is due to come to an end on 30 June 2017 and we expect to have delivered the vast majority of outcomes originally agreed with the EU when originally awarded this grant back in 2013.

17 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS STRATEGIC REPORT In addition to POWER-UP, and despite a delay as a consequence of one of our key projects partners entering into administration back in 2014, the ALKAMMONIA project continues with the bulk of work required for AFC Energy s delivery of a small scale system completed (as announced during the course of 2016). We are now awaiting delivery of the pilot scale ammonia cracker from a project partner in the first half of We look forward to updating the market on this project over the coming months. FINANCIAL OVERVIEW In 2016, AFC Energy s EU grant and other income was 1.0 million (2015: 2.3 million). The Company continued to be engaged during the year, and at year-end, in three EU-funded projects, ALKAMMONIA, LASER-CELL and POWER-UP. Overall activity on these EU-funded projects was lower than in the previous year, in particular due to the high level of activity associated with the POWER-UP project in the previous year, resulting in lower expenditure through cost of sales. Overall expenditure on research and development qualifying for R&D tax credits was 2.9 million (2015: 3.5 million), demonstrating the continued high-level of commitment to develop the Company s fuel cell system. An operating loss to 31 October 2016 of 6.3 million (2015: 8.6 million) has been recorded. Cash balances at 31 October 2016, excluding restricted cash, were 2.9 million (2015: 1.8 million). As mentioned in Post yearend developments above, subsequent to the year-end in March 2017, the Company successfully raised 8.1 million before expenses through a placement, subscription and shareholder open offer. OUTLOOK In December 2014, AFC Energy s commercialisation strategy was updated to deliver technical and commercial progression over a three-year window. In 2015, the primary focus was on building and successfully commissioning the world s largest alkaline fuel cell power plant. In 2016, our focus progressed to the delivery of a second generation fuel cell system and initiation of a commercial pipeline. In 2017, that journey continues, with the opportunity for the commercial deployment of our fuel cell systems. AFC Energy s objective is to be a world class energy company that leverages the deployment of low cost, high performance alkaline fuel cell technology to target global industrial scale, distributed generation and other related opportunities. Stationary fuel cell applications represent the largest subsector in a hydrogen economy that is rapidly building global momentum. In 2017, as we further evaluate our project opportunities, our primary focus remains the deployment of our fuel cell systems in commercial opportunities. As we develop this commercial pipeline, our stakeholders will witness renewed emphasis on system and cartridge cost reductions to ensure our technology can operate in an increasingly competitive and efficient manner. To achieve this, we continue to review our supply chain and the scope for recycling our fuel cells, as well as opportunities to improve the design of key components and system engineering will also see further focus on delivering the Company s commitments with its key partners, including those under the JDA with De Nora where significant advancements in the fuel cell system continue to be made. Our achievements to date optimally position AFC Energy for the delivery of commercial transactions and in turn support collaboration with our partners, for the international deployment of our fuel cell systems. I would like to thank all the staff, partners and contractors working with AFC Energy, together with the EU s FCH JU, and the Board, for their continued support. This Report, including the Managing Our Risks" section on page 18, was approved by the Board on 23 March ADAM BOND CHIEF EXECUTIVE OFFICER 23 March 2017 GOVERNANCE FINANCIAL STATEMENTS

18 16 STRONG PARTNERSHIPS AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 Strengthening a Complementary Relationship with De Nora In August, AFC Energy signed a Joint Development Agreement with Italy s Industrie De Nora S.p.A., a global leader in the field of electrochemistry and electrodes. De Nora is the pre-eminent provider of electrodes for electro-chemical processes and technologies internationally, including the chlor-alkali industry. Their Joint Venture with ThyssenKrupp (TK- UhdeChlorineEngineers) is the world's largest integrated EPC provider of chlor-alkali technology solutions. The chlor-alkali industry is one of the largest emitters of by-product hydrogen globally and therefore a key target for AFC Energy. The JDA with De Nora aims to facilitate further material improvement in the performance characteristics of our fuel cell technology and accelerate the timescale for achieving our targeted key metrics for: power, longevity, availability, cost and efficiency. The decision to collaborate followed extensive technical discussions. The JDA provides significant independent validation of AFC Energy and its technology by a world-leading industry player. The parties intend to widen the collaboration to develop new product offerings. This combines the AFC Energy fuel cell system with De Nora s proprietary technologies in order to provide reliable and performing integrated solutions to open new markets for mutual benefit. Technical and Commercial Benefits of Partnership Accelerate AFC Energy's technology platform for commercial deployment, unlocking market potential Fully compatible technology platform operating in alkaline environment Access to De Nora's world-leading experts in electro-chemical solutions, electrode structure and catalysts, from product development to mass manufacturing Integration with De Nora technology may create new combined solutions which include the AFC Energy fuel cell Access to De Nora's international network of chlor-alkali customers. We are excited to start the JDA with AFC Energy. Our technical teams have been very impressed by the advances which have been made to date by AFC Energy and are confident that further significant steps can be made by both parties working closely together. We look forward to progressing this mutually beneficial partnership with AFC Energy into a long-term strategic and commercial relationship. LUCA BUONERBA DE NORA S CHIEF MARKETING AND BUSINESS DEVELOPMENT OFFICER Liquid nitrogen tanks and evaporators.

19 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS Strategic Partnership With Peel Environmental AFC Energy agrees with Peel Environmental Limited ("Peel") to assess the techno-economic feasibility of the UK's largest hydrogen fuel cell precinct at Peel's Protos industrial park. Peel Environmental lies at the heart of The Peel Group, one of the foremost enterprises of new infrastructure for the waste, mineral and environmental technology sectors in the UK. The Group's specialist development teams have a proven track record in delivering high quality sustainable projects. Protos is located between Manchester, Liverpool and Chester and will deliver 250 hectares of industrial development in the North West of England. It represents a strategic cluster of businesses encompassing energy intensive industries with associated supply chains. Importantly, it reflects Peel's vision for an energy generation hub that provides secure, low carbon and low cost energy generation to its onsite facilities. AFC Energy will conduct the assessment in collaboration with Peel and other third party partners to review a range of hydrogen sources and offtake arrangements and work with local stakeholders that will see a proposed phasing of fuel cell projects at Protos commencing at 1MW, through to an estimated 35MW to 50MW of installed capacity at the site. "We are delighted to partner with AFC Energy in investigating the feasibility of this commercial-scale hydrogen fuel cell technoeconomic feasibility study A successful hydrogen fuel cell project of this scale will be a first for the UK." MYLES KITCHER MANAGING DIRECTOR OF PEEL ENVIRONMENTAL AND PROTOS A positive outcome from the technoeconomic assessment for the development of a 35MW to 50MW fuel cell project at Peel's Protos site could see the development of the UK's largest stationary fuel cell project and one of the largest in the world, confirming a growing transition towards a hydrogen based economy, and thereby positioning Protos and AFC Energy at the forefront of this movement. The feasibility study will be conducted over several months in MW Targeted installed capacity at the site STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS

20 18 MANAGING OUR RISKS Effective risk management underpins the delivery of our objectives. It is essential to protect our reputation and generate sustainable shareholder value. We aim to identify key risks at an early stage and develop actions to eliminate them or mitigate their impact and likelihood to an acceptable level. RISK MANAGEMENT FRAMEWORK IDENTIFY ASSESS AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 Our Principal Risks Risk 1 HEALTH AND SAFETY The risk of health and safety incidents or breaches. 2 TECHNOLOGY The risk is that we will not be able to successfully develop and apply the Company s alkaline fuel cell technology to potential products at the right cost or performance. The risk that technology is successfully developed but slower than anticipated. The risk that technical failure at product trials could affect ability to provide a product to customers. 3 COMPETITION AND MARKET OPPORTUNITY The risk that the advantages of our technology are eroded by competitors and this impacts the Company s future profitability and growth opportunities. 4 INTELLECTUAL PROPERTY The Company s competitive advantage is at risk from a loss or breach of its intellectual property rights. IMPLEMENT MITIGATE 5 OPERATIONAL There is a risk that the Company has insufficient operational capability and capacity to deliver project contracts in compliance with contractual commitments. OUR APPROACH TO RISK There are a number of risks and uncertainties that could adversely impact the achievement of the Company s strategy. The Board of Directors has identified and discussed the risks that are considered to have the highest severity and likelihood, along with the mitigations the Company adopts to either avoid the risk occurring or manage the impact. OUR RISK MANAGEMENT PROCESS The Executive Directors are responsible for managing and mitigating the risks to the Company. The Audit Committee reviews the processes and controls for ensuring key risks are identified and managed appropriately. The Committee is responsible for monitoring the quality of internal controls and for ensuring that the financial performance of the Company is properly monitored, controlled, and reported. The AIM Rules Compliance Committee is responsible for, among other things, monitoring the quality of internal procedures, resources and controls to enable compliance by the Company with the AIM Rules and the AIM Rules for Nominated Advisers. Risk management processes have been embedded at both Company and project levels, and form an integral day-to-day business activity. The processes support management and project teams to identify and understand the risks they face in delivering Company objectives and to develop mitigations to manage those risks. 6 DESIGN AND QUALITY The risk of design and quality issues with our alkaline fuel cell technology. 7 ACCESS TO FINANCE The risk the Company has insufficient capital to fund technology and early project development this may require additional equity funding to achieve commercialisation. 8 REGULATORY AND COMPLIANCE The risk that the Company or its staff breach applicable regulations. 9 KEY PERSONNEL The risk that key technical personnel who possess critical design know-how, depart the Company.

21 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS Mitigation Robust health and safety management, and continuous improvement and reinforcement of a safety-first culture in all work place environments, is paramount for the Company and enforced at all levels. The Company has implemented a robust control of technological progress against a budgeted plan, adopting principles of technology readiness levels. The Company is targeting different regional markets and we are broadening the application of our product in order to minimise the risk of failure in a single market or product. Adherence to codes and standards surrounding health and safety provides a transparent framework to minimise the risk of incidents, and ensures the integrity of AFC Energy s health and safety remains intact for the sake of our employees, partners, contractors and shareholders. External partners have also been identified and where relevant, engaged to support the development plan with transparent KPIs and road maps to develop a product that meets commercial product metrics, relating to power, longevity, availability, cost and efficiency. We continuously monitor market developments, and competitor activity. Change During the Year STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS The Company benefits from external advice provided by qualified patent attorneys. The integrity of the Company s IP management and the manner in which all contractual negotiations with third parties takes place to ensure IP protection and compliance are of critical importance to maintaining shareholder value. IP registers are reviewed regularly both in terms of existing patents, and also in terms of future and unregistered protection. The strategy for transition from technology development to commercial deployment focuses on long-term partnerships and collaboration with industry leading companies. Our partners and specialist external advisers are identified and developed to complement AFC Energy s project execution capability, both in terms of understanding local regulatory environments, through to construction, funding, operational and logistical support. This strategy will continue to be employed over the short to medium term by the Company. As the Company progresses towards product commercialisation, design defects and poor quality management, within the manufacturing processes, could have a direct impact on the Company s market reputation, with consequential loss of value. The Company adopts a high standard of manufacturing process and quality control to mitigate to a large extent the risk of product quality issues and failure. The Company adopts a budgeted technology development plan, aligned to pre-defined milestones, supported by prudent budgetary controls that can be measured and monitored to provide a robust means of mitigating risk of insufficient working capital. The Company is targeting meeting its financing needs from a mix of grant funding, tax credits and equity funding, which may be sought from institutional, retail or strategic sources. Once it reaches project deployment, additional sources of debt funding, such as project finance will also be considered. The Company is publicly listed on the AIM market, which results in significant disclosure and reporting obligations to the regulator, investors and other stakeholders. The Board and management, in consultation with its Nomad and legal advisers seek to ensure that applicable legislation is complied with. Further, the AIM Rules Compliance Committee actively supervises this area to ensure compliance. Key technical staff possess significant know-how regarding the ongoing development of the Company s technology. Loss of these staff members may adversely affect the ability of the Company to progress its research and development in a manner which is likely to achieve commercialisation. The Company actively monitors remuneration policy to ensure that staff are incentivised to remain with the Company. The Company requires current and former employees and directors to comply with stringent confidentiality obligations. KEY Risk increased Risk reduced No change

22 20 CORPORATE SOCIAL RESPONSIBILITY AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 The following section provides an overview of our material corporate responsibility activities, explains why they are important to us, and how we manage them. Governance and Business Ethics We do not tolerate bribery and corruption, and are committed to acting with integrity in all our business dealings and relationships. We strive to always comply with the UK Bribery Act 2010, and have adopted our own antibribery policy. We aim to always act ethically, and ensure our business partners adopt the same stringent standards. Health, Safety and Security We are committed to achieving and maintaining the highest health and safety standards. We work positively and proactively to create an open culture, and to engage all employees to help maintain our excellent safety record. To support this, we invest in specialist roles and systems. We commission regular reviews of our health and safety arrangements, calling on independent external practice experts to keep us informed of industry developments and insights so we can continue to improve. During the year ending 31 October 2016 there were no Lost-Time Accidents across the Company s sites. During 2017 we will be working with Bureau Veritas, the global leader in testing, inspection and certification, to develop our processes and systems with the aim of achieving OHSAS (Occupational Health and Safety) accreditation. Environment AFC Energy s products are designed to minimise any adverse impact on the environment, while reducing the carbon footprint of our customers' electricity generation, and in particular, enhance the utilisation of sources of renewable energy that would otherwise be wasted. Our Stade plant in Germany fully complies with the stringent environmental requirements of our partners. Air travel and building operations have been identified as two of the major factors in the Company s carbon emissions, and consequently, the Company encourages recycling across the business and also acts responsibly to minimise its carbon footprint created by travel. During the year ending 31 October 2016 we have complied with all environmental legislation and there were no reportable environmental incidents by the Company. During 2017 we will also work with Bureau Veritas to develop our processes and systems, with the aim of achieving ISO (Environmental Management) accreditation. Employees At the heart of our business is a dedicated, innovative team committed to our vision of an affordable fuel cell for the industrial market. We aim to recruit the best talent and be an equal opportunities employer, keeping our staff free from workplace discrimination and harassment. We also invest in their training and development, to equip our business with the skills and expertise to succeed.

23 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS AFC Energy s plant in Stade, Germany.

24 22 INTRODUCTION TO GOVERNANCE AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 The Board is highly committed to meeting the standards of corporate governance. THE ROLE OF THE BOARD The Board is collectively responsible for the longterm success of the Company and is ultimately responsible for its strategy, management, direction and performance. The Board sets the Company s strategic aims, ensures that the necessary financial and human resources are in place for the Company to meet its objectives, reviews progress towards the achievement of objectives and reviews the performance of management. The Board establishes the values, culture, ethics and standards of the Company and sets the framework for prudent and effective controls which enable risk to be assessed and managed. The Company does not comply with the UK Corporate Governance Code ( Code ). However, the Board has reported on the Company s Corporate Governance arrangements by drawing upon best practice available, including those aspects of the Code it considers to be relevant to the Company and best practice. The Board has delegated authority to its Committees to carry out the tasks defined in the Committees terms of reference. The Committees are the Audit Committee; the Remuneration Committee; and the AIM Rules Compliance Committee. The Board has delegated the dayto-day management of the Company to the Chief Executive Officer. AUDIT COMMITTEE The Company s Audit Committee members during the financial year comprised of Mitchell Field (Chairman) and Eugene Tenenbaum. The Committee meets formally twice a year, on dates linked to the Company s financial calendar, and at any other time when it has been appropriate to discuss audit, accounting or control issues. The Committee s principal responsibilities are: To monitor the integrity of the financial statements of the Company; To review the annual and interim financial statements to ensure that they present a balanced assessment of the Company s position; To review accounting policies and their application within the Company s financial statements; To review with the executive management and the Company s external Auditor the effectiveness of internal controls; To review with the Company s external Auditor the scope and results of their audit; and To oversee the relationship with the external Auditor. The external Auditor attends meetings of the Committee except when their appointment or performance is being reviewed. Executive Directors attend as and when appropriate. REMUNERATION COMMITTEE The Company s Remuneration Committee members during the financial year comprised of Tim Yeo (Chairman) and Mitchell Field. The Committee reviews the performance of the Executive Directors and sets the scale and structure of their remuneration and the basis of their service agreements. In determining remuneration, the Committee seeks to enable the Company to attract and retain Executives of the highest calibre. In doing so, the Committee takes advice as appropriate from external advisers on executive remuneration. The Committee also makes recommendations to the Board concerning employee incentive schemes. No Directors participate in discussions or decisions concerning their own remuneration. This Committee is also responsible for nominating candidates, for the approval of the Board, to fill either Executive or Non-Executive vacancies or additional appointments to the Board. The Committee retained independent search consultants in respect of the appointment of the Chief Financial Officer. Details of the Directors remuneration, service agreements and their interests in the share capital of the Company are disclosed in the Directors Report. AIM RULES COMPLIANCE COMMITTEE The Company s AIM Rules Compliance Committee members comprise of Tim Yeo (Chairman) and Mitchell Field. The Committee meets as appropriate. The Committee is responsible for, among other things, monitoring the quality of internal procedures, resources and controls to enable compliance by the Company with the AIM Rules and the AIM Rules for Nominated Advisers. BOARD AND COMMITTEE MEETINGS The table below shows the number of Board and Committee meetings of the Company held during the year, and the attendance of the individual Directors. It should be emphasised that this information does not fully reflect the contribution made to the Company s business by many of the Directors, who have also attended other meetings and events relating to the Company s business and activities during the year. BOARD Number of meetings held 7 Attendance by: Tim Yeo 7 Adam Bond 7 Mitchell Field 6 Eugene Shvidler 5 Eugene Tenenbaum 6 EMPLOYEES The Company s organisational structure has clearly documented and communicated levels of responsibility, delegated authority and reporting procedures. The professionalism and competence of employees is maintained through recruitment, performance appraisal, written job descriptions, personal training and development plans. The Board supports the highest levels of commitment and integrity from employees. Expected standards of behaviour are set out in the Staff Handbook, a copy of which is given to all employees. The Company is an equal opportunities employer and it is our policy to ensure that all job applicants and employees are treated fairly and on merit, regardless of their race, gender, marital status, age, disability, religious belief or sexual orientation. In common with many organisations we operate a performance appraisal system, the aim of which is to support employees to contribute fully to the organisation and to assist them to fulfil their potential. The Company encourages the involvement of its employees in its performance through both its Save As You Earn Scheme and its Share Option plan.

25 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS RELATIONS WITH SHAREHOLDERS The Board considers effective communication with shareholders to be very important, and encourages regular dialogue with investors. Shareholders will be given at least 21 days notice of the Annual General Meeting, at which they will have the opportunity to discuss the Company s development and performance. The Company s web site contains full details of the Company s activities, press releases, Regulatory News Service announcements, share price details and other information. MAINTENANCE OF A SOUND SYSTEM OF INTERNAL CONTROL The Directors have overall responsibility for ensuring that the Company maintains a system of internal control to provide them with reasonable assurance that the assets of the Company are safeguarded and that shareholders investments are protected. The system includes internal controls appropriate for a company of the size of AFC Energy, and covers financial, operational, compliance (including health and safety) controls and risk management. Such systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives; any system can provide only reasonable, and not absolute, assurance against material misstatement or loss. The process in place for reviewing AFC Energy s system of internal control includes procedures designed to identify and evaluate failings and weaknesses, and to ensure that necessary action is taken to remedy the failings. The Board has considered its policies with regard to internal controls as set out in the Code and undertakes assessments of the major areas of the business and methods used to monitor and control them. In addition to financial risk, the review covers operational, commercial, regulatory and health and safety risks. The risk review is an ongoing process with reviews being undertaken on a regular basis. The key procedures designed to provide an effective system of internal controls that are operating up to the date of sign-off of this report are set out below. CONTROL ENVIRONMENT There is an organisational structure with clearly defined lines of responsibility and delegation of accountability and authority. RISK MANAGEMENT The Company employs Directors and senior personnel with the appropriate knowledge and experience for a business engaged in activities in its field of operations, and undertakes regular risk assessments and reviews of its activities. Details of risks to the business which the Board considers to be potentially material are set out in the Strategic Report on pages 18 and 19. FINANCIAL INFORMATION The Company prepares detailed budget and working capital projections which are approved annually by the Board and are maintained and updated regularly throughout the year. Detailed management accounts and working capital cash flows are prepared and compared to budgets and projections to identify any significant variances. MANAGEMENT OF LIQUID RESOURCES The Board is risk averse when investing the Company s surplus cash. The Company s treasury management policy is reviewed periodically, and sets out strict procedures and limits on how surplus funds are invested. REVIEW OF CORPORATE GOVERNANCE The Board strives to comply with the key principles of the Code given the size of the Company and the nature of its operations. These have not been formally reviewed by the Company s auditors. The auditors responsibility extends only to reading this report as a part of the Annual Report and Accounts and considering whether it is consistent with the audited financial statements. STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS

26 24 OUR EXPERIENCED LEADERSHIP AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS 2016 The Board is responsible for the overall conduct of the Company and meets regularly to discuss reviews and reports on the business and plans of the Company. COMMITTEE MEMBERSHIP KEY Chair of Committee Member of Committee 1 Audit Committee 2 Remuneration Committee 3 AIM Rules Compliance Committee 2 3 TIM YEO NON-EXECUTIVE CHAIRMAN YEAR APPOINTED 2007 SKILLS AND EXPERIENCE Tim Yeo was formerly Member of Parliament for South Suffolk and Chairman of the House of Commons Energy and Climate Change Select Committee. OTHER COMMITMENTS He is a non-executive director of Groupe Eurotunnel SE, Chair of the University of Sheffield Energy 2050 Industrial Advisory Board, Chair of New Nuclear Watch Europe and Honorary Ambassador of Foreign Investment Promotion for South Korea. ADAM BOND CHIEF EXECUTIVE OFFICER YEAR APPOINTED * 2014 SKILLS AND EXPERIENCE Adam has over 18 years experience operating within the international energy sector both in executive management positions for listed energy companies, and in advisory capacities to both Governments and the private sector. Adam is well networked internationally across the conventional and unconventional energy sectors and has a strong understanding of energy markets and deal making within that sector. Adam s mandate is focused on driving AFC Energy s transition to an industry leading alkaline fuel cell company, whose focus is on project execution in defined key global markets. Adam was a Non-Executive Director of AFC Energy since 2012, and was formerly Director of both Waste2Tricity Ltd and JS Yerostigaz (Uzbekistan). He is qualified with Bachelors' degrees in commerce and law and a Master in Laws (Taxation). * Previously Non-Executive Director from 2012.

27 AFC ENERGY PLC ANNUAL REPORT & ACCOUNTS STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS JIM GIBSON CHIEF OPERATING OFFICER MITCHELL FIELD NON-EXECUTIVE DIRECTOR EUGENE TENENBAUM NON-EXECUTIVE DIRECTOR EUGENE SHVIDLER NON-EXECUTIVE DIRECTOR YEAR APPOINTED 2017 YEAR APPOINTED 2008 YEAR APPOINTED 2013 YEAR APPOINTED 2013 SKILLS AND EXPERIENCE Jim has almost 30 years' experience in operations management and business development roles within the engineering contracting sector. Jim spent 23 years at Foster Wheeler working in operational, business and commercial roles. This was followed by two years at ThyssenKrupp working in process technology/ business development. SKILLS AND EXPERIENCE Mitchell, who lives in Wales, is part owner of Richards and Appleby Holdings Ltd, a mid-sized manufacturing group engaged in the production, sales and distribution of branded personal care products. Among these are Leighton Denny, James Read and Joan Collins as well as several well-known heritage brands, including "Cyclax" which formerly held the Royal Warrant from Her Majesty the Queen. OTHER COMMITMENTS His principal role is sales and marketing, dealing with numerous blue-chip companies in the UK and over 60 companies internationally. Mitchell has other investments and manages interests in retailing, property, import/export and general trading. SKILLS AND EXPERIENCE Eugene served as head of corporate finance for OAO Sibneft in Moscow from 1998 through In 1994, he joined Salomon Brothers where he worked until Prior to that, he spent five years in corporate finance with KPMG in Toronto, Moscow and London. He was an auditor at PriceWaterhouse in Toronto from 1987 until Eugene is a chartered accountant and holds a Bachelors' degree in commerce and finance from the University of Toronto. OTHER COMMITMENTS He has numerous other directorships; notably, he is a member of the boards of Chelsea FC plc and Evraz plc (a FTSE 250-listed company). SKILLS AND EXPERIENCE Eugene worked at Russian oil major OAO Sibneft from 1996 through 2005, initially as senior vice president and, from 1998, as president of the company. Eugene is a graduate of the I. M. Gubkin Moscow Institute of Oil and Gas with a Masters in Applied Mathematics and he received an MBA and Masters in International Taxation from Fordham University in New York. OTHER COMMITMENTS He is currently executive Chairman of Highland Gold Mining Ltd, an AIM-quoted company, and is a member of the Board of Evraz plc, a FTSE 250-listed company.